The Public Accounts Committee has found HMRC to be dangerously overstretched, partly as a consequence of Brexit, and puts the department’s 2020 transformation programme into question

The Public Accounts Committee has found HM Revenue and Customs (HMRC) to be dangerously overstretched, partly as a consequence of Brexit.

The department is having to cope with no fewer than 15 major transformation programmes, and the PAC voiced its concerns, in its annual report on HMRC, that taxpayers could suffer from its overreach.

“HMRC’s transformation programme would have been less risky had it not attempted to do everything at the same time,” said committee chair Meg Hillier, in a comment accompanying the PAC’s report on HMRC’s performance in 2016-17. “What was already a precarious high-wire act is now being battered by the winds of Brexit, with potentially catastrophic consequences.

“Action arising from allegations in the so-called Paradise Papers could also significantly increase the authority’s workload. HMRC accepts something has to give, and it now faces difficult decisions on how best to use its limited resources – decisions that must give full consideration to the needs of all taxpayers.

“HMRC’s customer service has improved on the appalling levels of recent years, but its claims about call-answering times don’t stack up,” she said. “Any new deterioration would be wholly unacceptable.”

HMRC’s 15 transformation programmes, to which it was committed in 2015, are aimed at overhauling the tax system by 2020. The programmes include the closure of its national network of offices and relocation to 13 large regional centres, making tax digital for individuals and businesses, developing the Customs Declaration Service system, supporting the introduction of Universal Credit, and implementing the Tax-Free Childcare scheme.

The committee is taking the view that a 15% extra Brexit-related workload is rendering the transformation programmes, aimed at achieving a £717m efficiency saving by 2020, undeliverable. It estimated that Brexit entails about 40 additional projects. HMRC estimates it is on track to save £707m.

The PAC also restated its view, expressed in its report, Brexit and the future of customs, that “HMRC should report back to the Committee by March 2018 with clear plans on how it will manage the many challenges it faces due to Brexit and its ongoing transformation programmes”.

HMRC told the committee the “extent of technological change built into the transformation programme” is one of the factors behind its belief it is not “credible to continue with the transformation programme as it is”.

“There is a lack of incentive for HMRC to reduce Tax Credits fraud and error in the transition period to Universal Credit,” the report’s summary also stated.

The committee recommended HMRC step up its efforts to clamp down on tax evasion and avoidance in light of the revelations of the Panama Papers in April 2016 and the Paradise Papers in 2017.

Error and fraud levels climb

The committee also voiced alarm that the level of tax credits error and fraud has climbed, and is set to get worse. “HMRC estimates the overall level of error and fraud resulted in overpayments of 5.5% of total spending on tax credits in 2015–16, up from 4.8% in 2014–15.

“HMRC expects this rate to rise and peak between 7% and 8% in future years, well above its target of 5%.” It therefore recommends “HMRC should set out its strategy for tackling Tax Credits error and fraud, given the additional risks posed by transfer to Universal Credit, including a cost-benefit analysis of its approach”.

It recommended, too, SMEs be targeted more efficiently to bring in more of the tax that should be coming from that sector.

“These are serious, pressing challenges for HMRC, requiring swift and coordinated action in government,” said Hillier. “As a matter of urgency, the authority must set out a coherent plan and demonstrate it is fit for the future."

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